Spatial Correlation, Trade, and Inequality: Evidence from the Global Climate

Jonathan I. Dingel, Kyle C. Meng, Solomon M. Hsiang

NBER Working Paper No. 25447
Issued in January 2019
NBER Program(s):Development Economics, Environment and Energy Economics, Economic Fluctuations and Growth, International Finance and Macroeconomics, International Trade and Investment, Productivity, Innovation, and Entrepreneurship

This paper shows that greater global spatial correlation of productivities can increase cross-country welfare dispersion by increasing the correlation between a country’s productivity and its gains from trade. We causally validate this general-equilibrium prediction using a global climatic phenomenon as a natural experiment. We find that gains from trade in cereals over the last half-century were larger for more productive countries and smaller for less productive countries when cereal productivity was more spatially correlated. Incorporating this general-equilibrium effect into a projection of climate-change impacts raises projected international inequality, with higher welfare losses across most of Africa.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25447